What Shrinking Mortgage Debt Says About The US Housing Market

Fewer homes bought, more refinances, and older mortgages lead to principal balance declines


Shadows from the financial crisis and Great Recession still linger in Americans’ personal finances, researchers at the New York Fed found.

Mortgage debt outstanding nearly doubled in the period from 2000 and 2006, but has risen only about 1% since 2012, according to data compiled in the regional bank’s quarterly report on household debt and crisis.

Put another way, in 2008 just as the subprime crisis was coming to a head, Americans had $12.68 trillion in debt outstanding, of which housing debt made up $10 trillion, or 79% of the total. In the fourth quarter of 2015, there was $12.12 trillion in total debt, and housing’s share had dwindled to 72%, or $8.74 trillion.

One of the biggest contributors to the decline in mortgage debt is that Americans aren’t taking equity out of their homes at nearly the same rate as in the prior decade. Cash-out refinances and home equity lines of credit rose at a rate of more than $300 billion every year from 2003-2007. In 2015, such debt grew only by $30 billion.

“In fact,” the researchers note on their blog, “the small amount of cash-out refi going on is almost completely offset by people repaying second mortgages and HELOCs.”

But it’s not just a newfound frugality that’s keeping a lid on mortgage debt. The pace of home buying has slowed even as Americans are paying down their home loans.

The total amount paid against mortgage debt in 2015 was $288 billion, or 3.5% of the total outstanding. The last time the total amount of mortgage debt outstanding was $8.25 trillion was 2006, the height of the boom, the researchers noted. That year, consumers paid down only $170 billion, or 2.1% of the balance.

In recent years, much of the pay down has come thanks to lower interest rates. New mortgages are being lent with lower rates, and existing homeowners have been refinancing. The researchers also note that as credit standards have remained tight, most new mortgages are going to people with excellent credit, enabling them to pay lower rates.

Those factors have taken the weighed average interest rate on the outstanding mortgage debt balance from 7.65% in 2000 to 3.85% in 2015.

There’s another factor contributing to the higher pace of pay downs. The existing inventory of mortgage debt outstanding has aged significantly over the past decade as the pace of buying and selling slowed. That means mortgage payments are further along in their amortization process and principal, rather than interest, is being paid down.

Since 2008, the researchers note, aggregate mortgage payments have fallen 8% but principal payments have risen 41%.

The shrinking mortgage debt is a good thing, the New York Fed researchers conclude. Principal pay-down is a form of saving for borrowers, so in the face of rising home prices this means strengthening balance sheets for mortgagors. This is important, of course, as we learned in 2008 just how crucial household debts can be.

But some analysts worry that Americans’ equity is too concentrated in real estate assets. Another lesson from the 2008 crisis is that it can be very dangerous when the price of those assets plummets.

by Andrea Riquier for MarketWatch